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Even the most reasonable investment return expectations have to be reality-checked these days.

“I’m a 60-year-old retiree and would like to invest my RRSP with low-fees and a yearly return of 5 to 7 per cent – what would you recommend?” a reader recently asked.

Sounds like an easy one, right? Wouldn’t a good low-fee balanced mutual fund or exchange-traded fund work, or a diversified portfolio of stocks and bonds?

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Possibly, but I have concerns.

For one thing, this reader didn’t offer any information about risk tolerance or other retirement savings. That 5-per-cent to 7-per-cent average annual return would require a portfolio with a significant weighting in stocks, probably well more than 50 per cent. The level of investor consternation about the 8.9-per-cent decline by the S&P/TSX Composite Index last year suggests a lot of people may not be comfortable with a portfolio heavily tilted to stocks.

When you add a substantial bond weighting to a portfolio, you reduce price swings and risk on both the downside and upside. The Canadian bond market’s three-year average total return (price changes plus bond interest) was 1.9 per cent for the period ending Dec. 31. The Canadian stock market made 6.4 per cent, while the U.S. market made 8.6 per cent in Canadian dollars.

Investing in low-cost exchange-traded funds would mean fees of roughly 0.25 per cent or less – that’s for individual ETFs or balanced ETFs, which give you all the elements of a diversified portfolio. Add the cost of buying and selling ETFs through an online broker and you still have a modest overall cost of investing. But is this reader cut out to handle a portfolio of ETFs? My sense is that some people are not, much as they’d like to give ETFs a try.

A robo-adviser can make good sense for the aspiring ETF investor who needs help, but there’s an added cost of as much as 0.5 of a percentage point on top of ETF costs. This will further weigh on those targeted 5 per cent to 7 per cent gains.

The bottom line here is that 5 per cent on an average annual basis might be a more realistic target for a 60-year-old RRSP investor than 6 per cent or 7 per cent. Overshoot on your return expectations and all kinds of things can go wrong – you get too aggressive, you sell at a market low and then you’re too afraid to buy back in.

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